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Hedging is a Price Control Tool, and adds liquidity to the market.
Investors want risk. They profit by taking risk, but business people don't like market risk. A businessman likes to know that they can buy (or manufacture) at one price, ad then sell at a higher price. Hedging helps TRANSFER risk from those who do not want it (business people) to those who want it (Investors, Speculators.)
Companies hedge currencies because currency values fluctuate. The hedge allows for a control valve on price changes. In the most simple sense:
A farmer is thinking about growing corn. He sees by the price of corn in the futures market that growing corn would generate a good profit, but what if the price changes between right now and when the corn is grown? He could "lose the farm." So he hedges. He calls his broker and SELLS corn on the futures market today (SELLS SHORT.)
Three months later the corn has grown and he brings it to market, but the price has changed! Not to worry, he hedged. he receives $1 less per bushel due to the price change, BUT then he goes home and calls his broker and "OFFSETS" the hedge at the exchange resulting in a $1 per bushel profit. Viola! The exchange gain has offset the corn actuals market loss, and the farmer has earned his expected profit. The hedge saved the farm.
This is the most common and simple hedge - A SELL HEDGE.
What may be confusing you is that in currency, you may have a BUY SIDE HEDGE OR as SELL SIDE HEDGE. I'll start with the buy side example:
Let's say you are an American TequilaImporter. In May you place an order for tequila, to be delivered in August. The manufacturer insists on being paid in Pesos. So in essence, in August you will need to take your dollars, and BUY (convert) to Pesos. But what if the price of the peso changes (Goes Up)? We could lose our potential profit! So we hedge. We go into the currency futures market and BUY August Pesos today. We are now long in the market, and "hedged". When August comes, if the actual pesos cost us more, we can offset the loss with our market profit. Inversely, if the pesos cost us less than we expected, we take that savings to pay off our market loss.
On the sell side currency hedge, lets say for example you are the Tequila Manufacturer, and you happen to accept payment in dollars. Then you HAVE dollars coming - the same way the farmer has corn coming, so you would use a SELL HEDGE like the farmer.
The trick to understanding the hedge is to ask yourself, do I HAVE IT LIKE THE FARMER (SELL HEDGE), or do I NEED ITLIKE THE IMPORTER (BUY HEDGE.)
HAVE IT is a sell Hedge (A farmer has corn. A fund Manager HAS stocks)
NEED IT is a Buy Hedge (A Jeweler NEEDS gold to make an order. An importer needs yen.)
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It helps to earn foreign exchange very helpful -By Rutvik A. Shah
When does a currency crisis occur?
A currency crisis occurs when a country can no longer support the price of its currency in foreign-exchange markets under a fixed-exchange-rate system.
What is historical milieu?
the background provided by previous communication incidents between or among the communicators and which affects understanding in the current exchange.
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Did various kinds of currency inhibit trade in rome during the height of rome?
No, not in the least. In the Roman empire itself the money was standardized. When dealing with foreign currency, the Romans had bankers or money changers called "argtentari". These men were responsible for the exchange of coins among other things.No, not in the least. In the Roman empire itself the money was standardized. When dealing with foreign currency, the Romans had bankers or money changers called "argtentari". These men were responsible for the exchange of coins among other things.No, not in the least. In the Roman empire itself the money was standardized. When dealing with foreign currency, the Romans had bankers or money changers called "argtentari". These men were responsible for the exchange of coins among other things.No, not in the least. In the Roman empire itself the money was standardized. When dealing with foreign currency, the Romans had bankers or money changers called "argtentari". These men were responsible for the exchange of coins among other things.No, not in the least. In the Roman empire itself the money was standardized. When dealing with foreign currency, the Romans had bankers or money changers called "argtentari". These men were responsible for the exchange of coins among other things.No, not in the least. In the Roman empire itself the money was standardized. When dealing with foreign currency, the Romans had bankers or money changers called "argtentari". These men were responsible for the exchange of coins among other things.No, not in the least. In the Roman empire itself the money was standardized. When dealing with foreign currency, the Romans had bankers or money changers called "argtentari". These men were responsible for the exchange of coins among other things.No, not in the least. In the Roman empire itself the money was standardized. When dealing with foreign currency, the Romans had bankers or money changers called "argtentari". These men were responsible for the exchange of coins among other things.No, not in the least. In the Roman empire itself the money was standardized. When dealing with foreign currency, the Romans had bankers or money changers called "argtentari". These men were responsible for the exchange of coins among other things.
What exactly is the definition of currency hedging?
Currency hedging is also known as foreign exchange hedging. It involves a method used by companies to eliminate risk resulting from foreign exchange transactions.
What has the author Asko Torniainen written?
Asko Torniainen has written: 'Foreign exchange risk on competitive exposure and strategic hedging' -- subject(s): Hedging (Finance), Risk, Foreign exchange market
What is corporate hedging?
it is a way that a corporation can protect itself against the foreign exchange rates
What has the author David F DeRosa written?
David F DeRosa has written: 'Options on foreign exchange' -- subject- s -: Options - Finance -, Hedging - Finance -, Foreign exchange futures
What is foreign exchange hedging?
hedging is a way to get yourself protected against a big loss. You can even make an analogy of a hedge as having insurance for your trade. With forex hedging, you employ a method of decreasing the amount of loss that you are likely to experience if something bad comes up.
What are three functions of foreign exchange market?
1.Transfer function:Transferring purchasing power between countries. 2.Credit function: providing credit channels for foreign countries 3.Hedging function: Minimizing risk loss
What has the author Torben Juul Andersen written?
Torben Juul Andersen has written: 'Currency and interest rate hedging' -- subject(s): Financial futures, Foreign exchange futures, Forward exchange, Hedging (Finance), Interest rate futures, Option (Contract), Options (Finance) 'Interest raterisk management' -- subject(s): Forecasting, Interest rates, Investments
What has the author Thomas Zwirner written?
Thomas Zwirner has written: 'Devisenkursrisiko, Unternehmen und Kapitalmarkt' -- subject(s): Capital market, Foreign exchange futures, Hedging (Finance), Risk management
Concept of hedging?
The concept of hedging is to reduce the risk of financial loss. Hedging originated out of the 19th century commodity markets. A hedge can include stocks, exchange-traded funds, insurance, forward contracts, swaps, and options.
Which foreign exchange system has the highest foreign exchange rate?
The Zimbabwean has the highest foreign exchange rate.
What do you mean by foreign exchange?
Foreign Exchange is Exchange between two currency.
What are foreign exchange rates?
Foreign exchange rates are currency exchange value of other countries.
